) is the
of the European Union
, and is currently in use in 16
of the 27 Member States
. The states, known
collectively as the Eurozone, are Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the
Netherlands, Portugal, Slovakia, Slovenia and Spain.
currency is also used in a further five European countries,
formal agreements, and is consequently used daily by
some 327 million Europeans. Over 175 million people worldwide use
currencies which are pegged to the euro, including more than 150
million people in Africa.
The euro is the second largest reserve
and the second most traded currency in the world after
the U.S. dollar
. , with more
than €751 billion in circulation, the euro is the currency with the
highest combined value of cash in circulation
in the world, having
surpassed the U.S. dollar. Based on IMF estimates of
2008 GDP and purchasing power parity among the
various currencies, the Eurozone is the second largest economy in
The name euro
was officially adopted on 16 December 1995.
The euro was introduced to world financial markets as an accounting
currency on 1 January 1999, replacing the former European Currency Unit
(ECU) at a
ratio of 1:1. Euro coins
entered circulation on 1 January 2002. On
1 December 2009 the Treaty of
entered into force, and with it the euro became the
official currency of the European Union.
is managed and administered by the Frankfurt-based European Central Bank (ECB) and the Eurosystem
(composed of the central banks of the
As an independent central bank, the ECB
has sole authority to set monetary
. The Eurosystem participates in the printing, minting
and distribution of notes
in all Member States, and the
operation of the Eurozone payment systems.
The 1992 Maastricht Treaty
most EU Member States to adopt the euro upon meeting certain monetary and budgetary
, however, not all states have done so. The United
Kingdom and Denmark negotiated exemptions, while Sweden turned down
the euro in a 2003 referendum, and has circumvented the obligation
to adopt the euro by not meeting the monetary and budgetary
requirements. All nations that have joined the EU since 1993 have
pledged to adopt the euro in due course.
Coins and banknotes
All euro coins have a common side, and
a national side chosen by the Member States.
The euro is divided into 100 cents
(sometimes referred to as euro-cents
, especially when
distinguishing them from other currencies). In Community
legislative acts the plural forms of euro
are spelled without the s
normal English usage. Otherwise, normal English plurals are
recommended and used.All circulating coins have a common
showing the denomination or value, and a map in the
background. For the denominations except the 1-, 2- and 5-cent
coins that map only showed the 15 Member States which were members
when the euro was introduced. Beginning in 2007 or 2008 (depending on the
country) the old map is being replaced by a map of Europe also
showing countries outside the Union like Norway.
1-, 2- and 5-cent coins, however, keep their old design, showing a
geographical map of Europe with the 15 Member States of 2002 raised
somewhat above the rest of the map. All common sides were designed
by Luc Luycx
. The coins also have a
showing an image specifically chosen by the
country that issued the coin. Euro coins from any Member State may
be freely used in any nation which has adopted the euro.
The coins are issued in €2
, and 1c
denominations. In order to avoid the
use of the two smallest coins, some cash transactions are rounded
to the nearest five cents in the Netherlands (by voluntary agreement) and in Finland (by
with €2 face value have been issued with changes to the design of
the national side of the coin. These include both commonly issued
coins, such as the €2 commemorative coin for the fiftieth
anniversary of the signing of the Treaty of Rome, and nationally
issued coins, such as the coin to commemorate the 2004 Summer Olympics
issued by Greece.
These coins are legal tender throughout the Eurozone. Collector’s
coins with various other denominations have been issued as well,
but these are not intended for general circulation, and they are
legal tender only in the Member State that issued them.
The design for the euro banknotes
have common designs on both sides. The design was created by the
Austrian designer Robert Kalina
are issued in €500, €200, €100, €50, €20, €10, €5. Each banknote
has its own colour and is dedicated to an artistic period of
European architecture. The front of the note features windows or
gateways while the back has bridges. While the designs are
supposed to be devoid of any identifiable characteristics, the
initial designs by Robert Kalina were
of specific bridges, including the Rialto and the
Neuilly, and were subsequently rendered more generic; the
final designs still bear very close similarities to their specific
prototypes; thus they are not truly generic.
Some of the
highest denominations such as the €500 are not issued in all
countries, though they remain legal tender throughout the
Payments clearing, electronic funds transfer
All intra-EU transfers in euro are considered as domestic payments
and bear the corresponding domestic transfer costs. This includes
all Member States of the EU, even those outside the Eurozone
providing the transactions are carried out in euro. Credit/debit
card charging and ATM withdrawals within the Eurozone are also
charged as domestic, however paper-based payment orders, like
cheques, have not been standardised so these are still
domestic-based. The ECB has also set up a clearing system
, for large euro transactions.
A special euro currency sign
designed after a public survey had narrowed the original ten
proposals down to two. The European Commission then chose the
design created by the Belgian Alain
. The official story of the design history of the euro
sign is disputed by Arthur
, a former chief graphic designer for the EEC
, who claims to have created it as a
generic symbol of Europe.
The European Commission also specified a euro logo with exact
proportions and foreground/background colour tones. While the
Commission intended the logo to be a prescribed glyph shape, font
designers made it clear that they intended to design their own
variants instead. Typewriters
euro sign can create it by typing a capital 'C', backspacing and
it with the equal ('=')
sign. Placement of the currency sign relative to the numeric amount
varies from nation to nation, and there is no official
recommendation on the issue.
Introduction of the euro
The euro was established by the provisions in the 1992 Maastricht Treaty
. In order to participate
in the currency, Member States are meant to meet strict criteria
such as a budget deficit
of less than three per cent of
, a debt ratio of
less than sixty per cent of GDP, low inflation
, and interest
rates close to the EU average. In the Maastricht Treaty, the United
Kingdom and Denmark were granted exemptions per their request from
moving to the stage of monetary union which would result in the
introduction of the euro.
Economists who helped create or contributed to the euro include
, Neil Dowling
, Robert Mundell
. (For macro-economic theory, see below.) The name euro was
devised on 4 August 1995 by Germain
Pirlot, a Belgian esperantist and ex-teacher of French and
history, and officially adopted in Madrid on 16
Due to differences in national conventions for rounding and
significant digits, all conversion between the national currencies
had to be carried out using the process of triangulation via the
euro. The definitive
values in euro of these subdivisions
(which represent the exchange rates
which the currency entered the euro) are shown at right.
The rates were determined by the Council of the European Union,
based on a recommendation from the European Commission based on the
market rates on 31 December 1998. They were set so that one
European Currency Unit
would equal one euro. The European Currency Unit was an accounting
unit used by the EU, based on the currencies of the Member States;
it was not a currency in its own right. They could not be set
earlier, because the ECU depended on the closing exchange rate of
the non-euro currencies (principally the pound sterling
) that day.
The procedure used to fix the irrevocable conversion rate between
and the euro was different,
since the euro by then was already two years old. While the
conversion rates for the initial eleven currencies were determined
only hours before the euro was introduced, the conversion rate for
the Greek drachma was fixed several months beforehand.
The currency was introduced in non-physical form (travellers'
cheques, electronic transfers, banking, etc.) at midnight on 1
January 1999, when the national currencies of participating
countries (the Eurozone) ceased to exist independently. Their
exchange rates were locked at fixed rates against each other,
effectively making them mere non-decimal subdivisions of the euro.
The euro thus became the successor to the European Currency Unit
notes and coins for the old currencies, however, continued to be
used as legal tender
until new euro
notes and coins were introduced on 1 January 2002.
The changeover period during which the former currencies' notes and
coins were exchanged for those of the euro lasted about two months,
until 28 February 2002. The official date on which the national
currencies ceased to be legal tender varied from Member State to
Member State. The earliest date was in Germany where the mark
officially ceased to be legal tender on 31
December 2001, though the exchange period lasted for two months
more. Even after the old currencies ceased to be legal tender, they
continued to be accepted by national central banks for periods
ranging from several years to forever (the latter in Austria,
Germany, Ireland, and Spain). The earliest coins to become
non-convertible were the Portuguese escudos, which ceased to have
monetary value after 31 December 2002, although banknotes remain
exchangeable until 2022.
Direct and indirect usage
The euro is the sole currency of 16 EU Member States: Austria,
Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia
and Spain. These countries comprise the "Eurozone
" or "Euro Area", some 326 million people
With all but two of the remaining EU members obliged to join,
together with future members of the EU, the enlargement of the eurozone
set to continue further. Outside the EU, the euro is also the sole
currency of two former Yugoslavian states (Montenegro and Kosovo) and several
European micro states (Andorra, Monaco, San Marino and Vatican
City) as well as in overseas territories (Mayotte, Saint Pierre
and Miquelon, Akrotiri and Dhekelia, Saint Barthélemy and Saint
The Dutch Caribbean island Aruba still
used its Florin and the Netherlands Antilles its Guilder.
January 1, 2009 the city Höganäs in Sweden is a "Euro-city"
and the euro is used alongside of the Swedish krona.
Together this direct
usage of the euro outside the EU affects over 3 million
also gaining increasing international usage as a trading currency,
in Cuba, North Korea and Syria.
There are also various currencies pegged to the euro (see below).
Zimbabwe announced to abandon its local currency and use
major currencies instead including the euro and the United States dollar.
Usage as reserve currency
Since its introduction, the euro has been the second most
widely-held international reserve
after the U.S. dollar. The share of the euro as a
reserve currency has increased from 17.9% in 1999 to 26.5% in 2008,
at the expense of the U.S. dollar (its share fell from 70.9% to
64.0% in the same timeframe) and the Yen
fell from 6.4% to 3.3%). The euro inherited the status of the
second most important reserve currency from the German mark
remains underweight as a reserve currency in advanced economies
while overweight in emerging and developing economies: according to
the IMF the total of
euros held as a reserve in the world at the end of 2008 was equal
to USD 1.1 trillion, with a share of 22% of all currency reserves
in advanced economies, but a total of 31% of all currency reserves
in emerging and developing economies.
The possibility of the euro becoming the first international
reserve currency is now widely debated among economists.Former
Chairman Alan Greenspan
gave his opinion in September
2007 that it is "absolutely conceivable that the euro will replace
the dollar as reserve currency, or will be traded as an equally
important reserve currency." In contrast to Greenspan's 2007
assessment the euro's increase in the share of the worldwide
currency reserve basket has slowed considerably since the year 2007
and since the beginning of the worldwide credit crunch
Currencies pegged to the euro
[[File:DOLLAR AND EURO IN THE WORLD.svg|thumb|right|300px|Worldwide
use of the euro and the U.S. dollar:
Note that the Belarusian
ruble is pegged to the Euro, Russian Ruble and U.S.
Dollar in a currency basket.
the Eurozone, a total of 23 countries and territories which do not
belong to the EU have currencies that are directly pegged to the
euro including 14 countries in mainland Africa (they use the
CFP franc , the CFA
franc and the Moroccan dirham),
two African island countries (Comorian
franc and Cape Verdean
escudo), three French Pacific territories and another Balkan
and Herzegovina (Bosnia and Herzegovina
convertible mark). On 28 July 2009, São Tomé and
Principe signed an agreement with Portugal which will
eventually tie its currency to the euro.
With the exception of Bosnia and Herzegovina (which pegged their
currency against the German mark) and Cape Verde (formerly pegged
to the Portuguese escudo) all of these non-EU countries had a
currency peg to the French Franc before pegging their currencies to
the euro. Pegging a country's currency to a major currency is
regarded as a safety measure, especially for currencies of areas
with weak economies, as the euro is seen as a stable currency,
prevents runaway inflation and encourages foreign investment due to
Within the EU several currencies have a peg to the euro, in most
instances as a precondition to joining the Eurozone. The Bulgarian Lev
and the Estonian kroon
were formerly pegged to the
German mark, other EU memberstates have a direct peg due to ERM II:
the Danish krone
, the Lithuanian litas
and the Latvian lats
In total, over 150 million people in Africa use a currency pegged
to the euro, 25 million people outside the Eurozone in Europe and
another 500,000 people on Pacific islands.
Optimal currency area
In economics, an optimum currency area (or region) (OCA, or OCR) is
a geographical region in which it would maximize economic
efficiency to have the entire region share a single currency. There
are two models, both proposed by Robert A. Mundell
: the stationary
and the international
risk sharing model
. Mundell himself advocates the international
risk sharing model
and thus concludes in favour of the
Transaction costs and risks
The most obvious benefit of adopting a single currency is to remove
the cost of exchanging currency, theoretically allowing businesses
and individuals to consummate previously unprofitable trades. For
consumers, banks in the Eurozone must charge the same for
intra-member cross-border transactions as purely domestic
transactions for electronic payments (e.g., credit cards
and cash machine
The absence of distinct currencies also removes exchange rate
risks. The risk of unanticipated
exchange rate movement has always added an additional risk or
uncertainty for companies or individuals that invest or trade
outside their own currency zones. Companies that hedge
against this risk will no longer need
to shoulder this additional cost. This is particularly important
for countries whose currencies had traditionally fluctuated a great
deal, particularly the Mediterranean nations.
Financial markets on the continent are expected to be far more
and flexible than they were
in the past. The reduction in cross-border transaction costs will
allow larger banking firms to provide a wider array of banking
services that can compete across and beyond the Eurozone.
Another effect of the common European currency is that differences
in prices – in particular in price levels – should decrease because
of the 'law of one price
Differences in prices can trigger arbitrage
, i.e. speculative
trade in a commodity
across borders purely to exploit the
price differential. Therefore, prices on commonly traded goods are
likely to converge, causing inflation in some regions and deflation
in others during the transition. Some evidence of this has been
observed in specific markets.
Low levels of inflation are the hallmark of stable and modern
economies. Because a high level of inflation acts as a tax
) and theoretically
discourages investment, it is generally viewed as undesirable. In
spite of the downside, many countries have been unable or unwilling
to deal with serious inflationary pressures. Some countries have
successfully contained them by establishing largely independent
central banks. One such bank was the Bundesbank in Germany; as the European Central Bank is
modelled on the Bundesbank, it is independent of the pressures of
national governments and has a mandate to keep inflationary
Member countries that join the bank commit to
lower inflation, hoping to enjoy the macroeconomic stability
associated with low levels of expected inflation. The ECB (unlike
the Federal Reserve
United States of America) does not have a second objective to
sustain growth and employment.
Many national and corporate bonds
denominated in euro are significantly more liquid and have lower
interest rates than was historically the case when denominated in
legacy currencies. While increased liquidity may lower the nominal interest rate
on the bond,
denominating the bond in a currency with low levels of inflation
arguably plays a much larger role. A credible commitment to low
levels of inflation and a stable debt reduces the risk that the
value of the debt will be eroded by higher levels of inflation or
default in the future, allowing debt to be issued at a lower
nominal interest rate.
Evidence on the effect of the introduction of the euro
In conformity with the economic predictions, empirical studies have
found that the introduction of the euro has had a positive impact
on the movement of goods, financial assets, and people within the
Eurozone. In addition, countries which previously had weak
currencies have benefited from lower interest rates and their firms
now have easier access to capital.
The consensus from the studies of the effect of the introduction of
the euro is that it has increased trade within the euro area by 5%
to 10%. On the lower bound, one study suggested an increase of 3%.
A recent study estimates this effect to be between 9 and 14%.
Studies have found a positive effect of the introduction of the
euro on investment. Physical investment seems to have increased by
5% in the Eurozone due to the introduction. Regarding foreign
direct investment, a study found that the intra-Eurozone FDI stocks
have increased by about 20% during the first four years of the EMU.
Concerning the effect on corporate investment, there is evidence
that the introduction of the euro has resulted in an increase in
investment rates and that it has made it easier for firms to access
financing in Europe. The euro has most specifically stimulated
investment in companies that come from countries that previously
had weak currencies. A study found that the introduction of the
euro accounts for 22% of the investment rate after 1998 in
countries that previously had a weak currency. The effect is
however less clear for firms coming from the strong currency
countries; the introduction has not been beneficial for most of
The introduction of the euro has led to extensive discussion about
its possible effect on inflation. In the short term, there was a
widespread impression in the population of the Eurozone that the
introduction of the euro had lead to an increase in prices.
Paradoxically, this impression has not been supported by general
indices of inflation, showing no major effect of the introduction
of the euro. A study of this paradox has found that it is due to an
asymmetric effect of the introduction of the euro on prices: while
it had no effect on most goods, it had an effect on cheap goods
which have seen their price round up after the introduction of the
euro. The study found that consumers based their beliefs on
inflation of those cheap goods which are frequently purchased. It
has also been suggested that the jump in small prices may be due to
the fact that prior to the introduction, retailers made fewer
upward adjustments and waited for the introduction of the euro to
Exchange rate risk
One of the advantages of the adoption of a common currency is the
reduction of the risk associated with changes in currency exchange
rates. It has been found that the introduction of the euro created
"significant reductions in market risk exposures for nonfinancial
firms both in and outside of Europe". These reductions in market
risk "were concentrated in firms domiciled in the Euro area and in
non-Euro firms with a high fraction of foreign sales or assets in
Europe". These changes were however "statistically and economically
The introduction of the euro seems to have had a strong effect on
European financial integration. According to a study on this
question, it has "significantly reshaped the European financial
system, especially with respect to the securities markets [...]
However, the real and policy barriers to integration in the retail
and corporate banking sectors remain significant, even if the
wholesale end of banking has been largely integrated."
Specifically, the euro has significantly decreased the cost of
trade in bonds, equity, and banking assets within the
On a global level, there is evidence that the introduction of the
euro has led to an integration in terms of investment in bond
portfolios, with Eurozone countries lending and borrowing more
between each other than with other countries.
Effect on interest rates
The introduction of the euro has decreased the interest rates of
most members countries, in particular those with a weak currency.
As a consequence the market value of firms from countries which
previously had a weak currency has very significantly increased.
The countries who benefited the most from a decrease in interest
rates are Greece, Ireland, Portugal, Spain, and Italy.
The evidence on the convergence of prices in the Eurozone with the
introduction of the euro is mixed. Several studies failed to find
any evidence of convergence following the introduction of the euro
after a phase of convergence in the early 1990s. Other studies have
found evidence of price convergence, in particular for cars. A
possible reason for the divergence between the different studies is
that the processes of convergence may not have been linear, slowing
down substantially between2000 and 2003, and resurfacing after 2003
as suggested by a recent study (2009).
A study has found that the introduction of the euro has had a
positive effect on tourism flows within the EMU, with an increase
U.S. dollars]] per 1 euro
|Source: Euro exchange rates in USD, ECB
Flexible exchange rates
The ECB targets interest rates rather than exchange rates and in
general does not intervene on the foreign exchange rate markets,
because of the implications of the Mundell-Fleming Model
that a central bank cannot maintain interest rate and exchange rate
targets simultaneously because increasing the money supply
results in a depreciation
of the currency. In the years
following the Single European
Act, the EU has liberalised its capital markets, and as the
ECB has chosen monetary autonomy, the exchange rate regime of the euro is
flexible, or floating.
This explains why the exchange rate of the euro vis-à-vis other
currencies is characterised by strong fluctuations. Most notable
are the fluctuations of the euro versus the U.S. dollar, another
free-floating currency. However this focus on the dollar-euro
parity is partly subjective. It is taken as a reference because the
euro competes with the dollar's role as reserve currency. The
effect of this selective reference is misleading, as it gives
observers the impression that a rise in the value of the euro
versus the dollar is the effect of increased global strength of the
euro, while it may be the effect of an intrinsic weakening of the
Against other major currencies
After the introduction of the euro, its exchange rate against other
currencies fell heavily, especially against the U.S. dollar. From
an introduction at US$1.18/€, the euro fell to a low of $0.8228/€
by 26 October 2000. After the appearance of the coins and notes on
1 January 2002 and the replacement of all national currencies, the
euro began steadily appreciating, and regained parity with the U.S.
dollar, on 15 July 2002. The euro has not fallen below parity with
the U.S. dollar since December 2002 but has risen in value.
Exchange rate evolution of the euro
compared to USD, JPY and GBP.
Exchange rate at start is put to 1.
Green: in Jan-1999: €1 = $1.18 ; in Jul-2008: €1 =
Red: in Jan-1999: €1 = ¥133 ; in
Jul-2008: €1 = ¥168
Blue: in Jan-1999: €1 = £0.71 ;
in Jul-2008: €1 = £0.80
On 23 May 2003, the euro surpassed its initial ($1.18) trading
value for the first time. At the end of 2004, it reached $1.3668
(€0.7316/$) as the U.S. dollar fell against all major currencies.
Against the U.S. dollar, the euro temporarily weakened in 2005,
falling to $1.18 (€0.85/$) in July 2005, and was stable throughout
the third quarter of 2005. In November 2005 the euro again began to
rise steadily against the U.S. dollar, hitting one record high
after another. On 15 July 2008, the euro rose to an all-time high
of $1.5990 (€0.6254/$). In a reversal, in August 2008 the euro
began to drop against the U.S. dollar. In just two weeks the euro
fell from its peak to $1.48 and by late October it reached a two
and a half year low below $1.25 before moving back above $1.50 by
November 2009. On 29 December 2008, the pound sterling
fell to an all-time low of
£0.97855 (€1.0219/£) against the euro, although its value has
recovered somewhat in 2009.
The formal titles of the currency are euro
for the major
unit and cent
for the minor (one hundredth) unit and for
official use in most Eurozone languages; according to the ECB, all
languages should use the same spelling for the nominative singular.
This may contradict normal rules for word formation in some
languages; e.g., those where there is no eu diphthong
. Bulgaria has negotiated an exception;
in the Cyrillic alphabet is spelled as eвро
) and not eуро
) in all
official documents. For non-legally binding texts in English, the
European Commission's Directorate-General
recommends that the plural forms euros
should be used when appropriate.
Notes and references
- Robert Kalina, designer of the euro banknotes, at
work at the Oesterreichische Nationalbank in Vienna.
- by means of Council Regulation 2866/98 (EC) of 31 December
- by Council Regulation 1478/2000 (EC) of 19 June 2000.
- A Plan for a European Currency, 1973 by Mundell
- ECB official rates against the U.S. dollar from
- ECB official rates against the British pound
- "EVRO" DISPUTE OVER – PORTUGUESE FOREIGN
MINISTER – Sofia Echo
- For example, see European Commission, Directorate General for
Translation: English Style Guide section 20.8 "'The euro.
Like 'pound', 'dollar' or any other currency name in
English, the word 'euro' is written in lower case with no initial
capital and, where appropriate, takes the plural 's' (as does
'cent')." European Commission Directorate-General for
Translation – English Style Guide.
- Baldwin, Richard and Charles Wyplosz, The Economics of
European Integration, New York: McGraw Hill, 2004.
- European Commission, High Level Task Force on Skills and
Mobility – Final Report, 14 December 2001.